TAX TREATY AS A MODE OF ELIMINATING

DOUBLE TAXATION:
1) EXEMPTION METHOD the income or capital
which is taxable in the state of source or situs is
exempted in the state of residence, although in
some instances it may taken into account in
determining the rate of tax applicable to the tax
payers remaining income or capital (ex. Tax
Sparing Credit scheme)
2) CREDIT METHOD the tax paid in the state of
source is credited against the tax levied in the
state of residence
Afisco Insurance Corp v. CA (G.R. No. 112675,
Jan. 25, 1999)
Petitioners are local non-life insurance corps. Which
formed a pool in order to enter into a Reinsurance
Treaty with a German company. BIR assessed
deficiency taxes against the pool on the ground that
it is considered a partnership taxable as a corp.
Petitioners insist that the pool is a mere agent, not
acting on its own and therefore, cannot be taxed as a
corp., there being no risk undertaken by the pool, no
common fund and no control exercised by its board in
the management of its fund.
Issue (1) : Is the Pool Taxable as a Corp?
Held (1): YES. Pursuant to 24 of the NIRC, the
pool is included within the definition of domestic
corps. Which comprises even unregistered
partnerships and associations. In this case, the
ceding cos. Entered into an association that would
handle all business under the Treaty. It has a
common fund and an executive board to manage its
affairs. Moreover, even if the pool itself did not issue
any policies on its own, its work was indispensable to
the business of the ceding companies and the
German Co,
Issue (2): Is there double taxation?
Held(2): NO. Double taxation means taxing the
same person twice by the same jurisdiction for the
same thing. The pool is a taxable entity distinct from
the individual corporate entities of the ceding
companies. The tax on its income is obviously
different from the tax on the dividends received by
the said companies.
Power to Tax Involves Power to Destroy [Chief
Justice Marshall, McCullough v. Maryland, 4 L.Ed.
579 (1819)]
The imposition of a valid tax could not be judicially
restrained merely because it would prejudice a
taxpayers property. As long as the power to tax
does not violate any constitutional or statutory
provisions, said power can be a power to destroy.
But for all its plenitude, the power to tax is not
unconfined as there are restrictions. Adversely
effecting as it does property rights, both the due

process and equal protection clauses of the

Constitution may properly be invoked to invalidate in
appropriate cases a revenue measure. If it were
otherwise, there would be truth to the dictum that the
power to tax involves the power to destroy. The web
or unreality spun from Justice Marshalls famous
dictum was brushed away by one stroke of Mr.
Justice Holmes pen, thus: The power to tax is not
the power to destroy while this Court sits. So it is in
the Philippines. [Reyes v. Almanzor (1991), citing
Sison v. Ancheta (1984); Obillos v. CIR (1985)].
Tax Avoidance (Tax Minimization) tax saving
device that is legally permissible
Tax Evasion (Tax Dodging) connotes fraud
through the use of pretenses and forbidden devices
to lessen or defeat taxes; must be willful and
intentional.
CIR vs. The Estate of Benigno Toda, GR No.
147188, Sept. 14, 2004
Facts: This Court is called upon to determine in
this case whether the tax planning scheme adopted
by a corporation constitutes tax evasion that would
justify an assessment of deficiency income tax.
CIC authorized Toda, Jr., President and owner
of 99.991% of its issued and outstanding capital
stock, to sell the Cibeles Building and the two
parcels of land on which the building stands for an
amount of not less than P90M. Toda then
purportedly sold the property for P100 M to Rafael
Altonaga, who, in turn, sold the same property on
the same day to RMI for P200M. These 2
transactions were evidenced by Deeds of Absolute
Sale. For the sale of the property to RMI, Altonaga
paid capital gains tax in the amount of P10M.
CIC filed its corporate annual ITR for the year
1989, declaring, among other things, its gain from
the sale of real property in the amount of
P75,728.021. Toda sold all his shares. He died 3
yrs. later.
The BIR sent an assessment notice and
demand letter to the CIC for deficiency income tax
for the year 1989 in the amount of P79,099,999.22,
representing the tax, surcharge, & interest on the